Targeted Advertising and Pricing on the Internet

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1 on the Internet Mark University College London Jevons conference on Competition in Digital Media July 2010

2 Targeted Advertising What s the harm? 19th century retailer John Wanamaker: Half the money I spend on advertising is wasted and the trouble is I don t know which half not so di erent from contextual advertising (lipstick ads in Vogue, etc.) explains why newspapers in more segmented markets can charge more per reader for advertising, and why online advertisers are willing to pay more per click for longer search terms ignoring price e ects, expect consumers to bene t if they see ads tailored to their interests but if advertisers can better target those consumers who like a particular brand, likely to lead to less intense price competition (Iyer, Soberman & Villas-Boas 2005)

3 Privacy Policy I Count not him among your friends who will retail your privacies to the world [Publius Syrus, 1st century BC] Broader issue concerns collection and use of online tracking data could be used as basis for price o ers (see below) privacy issues related to shared computer use (if ads for dating websites pop up, say) or social network sites (Beacon on Facebook) Impractical, and probably undesirable, to prevent a rm from collecting information about its own customers but need to give (legal) incentives to keep data secure (e.g., Thelma Arnold, Facebook)

4 Privacy Policy II Impossible to give cast-iron commitment not to reveal information to third party (e.g., some mergers appear to occur for sole purpose of acquiring customer data) Makes huge di erence whether consumers have to opt in or opt out of permitting third party use of information could be behavioral or maybe many consumers are close to indi erent are policy-makers su ciently con dent of the correct policy to be used as default (in possible contrast to organ donation, say) don t want to make consumers consent every time they visit a website force consumers to actively choose the settings on their web browser (e.g., allow all cookies, deny all cookies, choose each time), with no default?

5 Costs of an Interventionist Privacy Policy [Goldfarb & Tucker 2010] Europe since mid-1990s has more constraints on targeted advertising than the US Study reports e ectiveness of nearly 10,000 online display advertising campaigns in each campaign, half the consumers (who were already selected as being suitable for the product) randomly saw the targeted ad and half saw a placebo (for a charity typically) di erence in the willingness to buy the product in the two groups is the campaign s e ectiveness after the Privacy Directive was passed, advertising e ectiveness fell in Europe by around 65% if Europeans browsed US websites, e ectiveness was una ected E ect most marked for general interest websites (news, etc.), since they could not provide contextual advertising privacy regulations could hit these content providers hardest

6 Targeted pricing I Hard to distinguish targeted pricing from targeted advertising Some consumer attributes may be less salient on the internet e.g., minorities may be disadvantaged buying a car in person but not online [Scott Morton, Zettelmayer & Silva-Risso 2003] hard to do high pressure selling on the internet Already seen in o ine markets mailing lists with demographic, etc., data are valuable loyalty cards with personalised discounts pricing low to new customers Hard to verify it is going on online seller can always claims it is engaging in a pricing experiment, or there has been a software glitch

7 Targeted pricing II Many ways to use browsing history or IP address to in uence prices: geographic location may be relevant (akin to price exing by chain stores) browsing history may reveal information about income, interests, brand preferences, propensity to compare prices e.g., e-retailer may know whether consumer has come to it directly from a price comparison website [Baye & Morgan 2002, Turow 2006] e-retailer (e.g., travel site) may see that consumer searches for ight with it, gets quote, then goes to rival website, then comes back

8 Forms of price targeting I [ 2006] Sellers know a consumer s willingness-to-pay (e.g., for particular CD) bad outcome for consumer under monopoly with competition makes little di erence to price paid Sellers know how choosy (or price sensitive) a consumer is e.g., whether a consumer has come directly from a price comparison site expect targeted prices will harm choosy consumers and bene t price sensitive consumers

9 Forms of price targeting II Sellers know which brand a consumer prefers likely to work in every consumer s favour e.g., there are two brands, A and B, and 50% of consumers are willing to pay 3 for A and 1 for B, while remaining consumers have reverse preferences without price targeting, each brand will choose price 3 (assuming no costs) if separate prices can be targeted at the two kinds of consumer, the preferred brand can now only charge 2 cannot make blanket statement that consumers dislike targeted prices